TradFi Meets DeFi on the Stablecoin Bridge

A Journey Toward Stability in the Digital ‘Wild West’

Once upon a time, the great city of civilization began to flow with the lifeblood called ‘money.’ This blood became the medium for buying and selling goods, the measure of value, and the storehouse of wealth that kept the city alive and breathing. Then in 2009, a new entity called Bitcoin appeared, challenging all these rules. The emergence of ‘digital gold’ that could transfer value without banks or governments was nothing short of a revolution.

But this revolutionary land was like a rough ‘Wild West.’ Bitcoin, which was worth the price of a car yesterday, could plunge to the price of a motorcycle today—an unpredictable place. Such extreme volatility was a huge barrier preventing cryptocurrencies from being used as everyday money.

People longed for something that preserved the advantages of blockchain technology while holding a stable value like the money we use daily. They needed a sturdy ‘anchor’ to calm the wild waves of volatility.

At that moment, answering the market’s call, stablecoins emerged. As their name suggests, they are ‘stable coins.’ By pegging their value 1:1 to real-world assets like the US dollar, they became ‘digital dollars’ operating on the blockchain.

But this story doesn’t end here. Stablecoins evolved beyond a technical fix for volatility into a massive bridge connecting two different worlds: one governed by trust and regulation—Traditional Finance (TradFi)—and the other driven by code and autonomy—Innovative Finance (DeFi). Stablecoins became the lingua franca enabling communication between these two realms.

From now on, we will explore how this amazing bridge was built, what roles it plays, and where it is headed. From the secret recipe for stability, real-world stories changing lives globally, to a future where money thinks and works on its own, we will unravel everything about stablecoins in an easy and engaging way.

Chapter 1: The Secret Recipe for Stability – Four Faces of Stablecoins

The core of stablecoins is ‘stability,’ but the methods to achieve it vary. Like chefs with their secret recipes, let’s look at the four main recipes one by one.

1. Fiat-Collateralized Stablecoins: The Most Trusted Digital Vault

This is the most intuitive and widely used recipe. It’s simple: for every 1 stablecoin created (e.g., 1 USDC), a real 1 dollar is stored in a bank vault in the real world. This 1:1 promise is the key to stability.

How is the $1 value maintained? An invisible hand called ‘arbitrage’ works.

• When the price is $0.99: Smart investors buy 1 USDC at $0.99 on the market and redeem it with the issuer for a real $1. They earn 1 cent profit, and this buying pressure pushes the USDC price back to $1.
• When the price is $1.01: Conversely, investors buy 1 USDC from the issuer for $1 and sell it on the market for $1.01, earning 1 cent. This selling pressure brings the price back down to $1.

So the most important factor is ’trust.’ We must believe that the issuing company “really keeps the money equivalent to the coins issued safely in the vault.” Therefore, leading players like USDT (Tether) and USDC (USD Coin) strive to earn trust in different ways.

• USDT: As a market pioneer, it leveraged speed and wide usage but faced skepticism over the transparency of its reserves in the past.
• USDC: From the start, it prioritized regulation and transparency, backing reserves only with cash and safe US government bonds, and publishing monthly audits by accounting firms to build trust.

2. Crypto-Collateralized Stablecoins: A Self-Operating Digital Central Bank

“If we can’t trust banks, let’s build a digital bank ourselves!” This idea gave rise to the crypto-collateral model. Users lock other cryptocurrencies like Ethereum (ETH) as collateral to borrow stablecoins.

But the collateral itself, like Ethereum, is volatile. So a safety buffer called ‘over-collateralization’ is used. For example, to borrow $100 worth of the stablecoin DAI, you must lock up $150 worth of Ethereum. This extra $50 acts as a cushion against price drops. If the collateral value falls to a risky level, the system automatically sells the collateral to repay the debt through an ‘auto-liquidation’ feature.

The leading project MakerDAO acts like a small central bank coded in software, adjusting interest rates and policies to keep DAI’s value pegged to $1. However, this model faces an interesting challenge called the ‘decentralization paradox’ because a significant portion of its collateral depends on centralized USDC.

3. Commodity-Collateralized Stablecoins: Digital Gold in the Vault

This recipe is similar to the first but uses physical commodities like gold or oil as collateral instead of dollars. Tokens like PAX Gold (PAXG) represent ownership certificates for 1 ounce of gold stored in a vault. This allows investors to hold gold digitally and transfer it anytime, anywhere, without carrying heavy metal.

4. Algorithmic Stablecoins: An Ambitious Experiment Ending in Tragedy

The most ambitious and risky recipe. It tried to maintain the $1 value by adjusting the money supply through a smart algorithm without any collateral.

But in May 2022, the collapse of TerraUSD (UST) showed how dangerous this experiment was. UST’s value was backed by its sister token Luna (LUNA), but when market confidence suddenly evaporated, everything spiraled down in a ‘death spiral.’ Within days, $60 billion in value vanished, leaving a painful lesson on how fragile trust without collateral can be.

Chapter 2: Stablecoins in the Real World – Stories Changing the World

Stablecoins are no longer just toys for technologists. They are permeating our lives and solving long-standing problems. Here are some stories.

1. Visa and PayPal Join the Fray: Faster, Cheaper Corporate Payments

Sending money overseas used to take 3–5 days and cost high fees due to multiple banks involved. But giants like Visa started using stablecoins as a new ‘payment highway.’ Using USDC, they process cross-border payments almost in real-time, 24/7, at low cost. PayPal even created its own stablecoin, PYUSD, enabling 400 million users to freely send and receive money within the app. This marks the beginning of a massive upgrade to the old financial system.

2. Argentina’s Refuge: Digital Dollars to Preserve Value

In Argentina, suffering hyperinflation with prices rising hundreds of percent annually, the peso melts like ice cream. People try to convert their salaries immediately into stable US dollars, but government controls make it difficult. Here, stablecoins became a survival tool as ‘digital dollars.’ Anyone with a smartphone can protect their assets from government interference.

3. Hope for Filipino Overseas Workers: More Money for Families

Sending hard-earned money home to families in the Philippines used to cost 6–8% in fees through traditional remittance services. Using stablecoins, fees drop below 1%, and transfers that took days now arrive in minutes. This is not just technological progress but a warm change that materially helps millions of families.

Chapter 3: The Heart of DeFi – The Reserve Currency of This New Financial World

Decentralized Finance, or DeFi, is a new financial playground operating solely on code and rules without banks or brokers. In this playground, stablecoins are not just one of many toys but the reserve currency forming the foundation and center of all activity.

• Fuel for lending markets: Users lock assets like Ethereum expecting price gains and borrow stablecoins to invest elsewhere. Conversely, those seeking stable interest income lend out stablecoins. Stablecoins thus bridge risk-taking capital and capital seeking stability.
• Efficient exchange hubs: Platforms like Curve Finance specialize in swapping stablecoins with minimal loss and very low fees, even for millions of dollars. It has become the most important hub where all stablecoins in DeFi converge.

Chapter 4: The Next Frontier – A Future Where Money Works on Its Own

The journey of stablecoins is just opening a new chapter. Beyond storing and transferring value, they are becoming ‘Lego blocks’ that fundamentally change the financial system.

1. Programmable Money: Embedding Logic into Currency

Until now, money was passive, doing only what we told it. But when stablecoins meet smart contracts, money can check conditions and execute transactions on its own—programmable money.

• “When goods arrive at the warehouse, automatically pay the carrier!”
• “Whenever my song is streamed, send royalties to my wallet within a second!”

Complex contracts that once required many steps can now be handled instantly, transparently, and automatically by smart money.

2. Real-World Asset (RWA) Tokenization: Bringing Everything onto the Blockchain

This is the ‘holy grail’ dream of blockchain technology. Attaching digital certificates—tokens—to all real-world assets (RWA) like US government bonds, real estate, and artworks. Experts predict this market could grow to $16 quadrillion by 2030.

• Why is this important? So far, DeFi has been confined to the crypto world. But if stable, massive real-world assets like US bonds are tokenized and enter DeFi, it opens the door for trillions of dollars of institutional capital.
• Projects like Ondo Finance have already created tokens that let users enjoy stable US bond yields on-chain, and Centrifuge tokenizes small business invoices, opening new financing avenues.

Standing at the Dawn of a Massive Transformation

Stablecoins were born to solve the small problem of volatility but have grown to change global payment systems, become the heart of DeFi’s new financial world, and now create a massive flow bringing all real-world assets into the digital realm.

Of course, challenges remain: risks of external shocks like bank failures (depegging risk), centralization risk relying on a few companies, and still uncertain regulatory issues.

The future will likely find answers within the ‘stablecoin trilemma’—it’s difficult to perfectly achieve decentralization, stability, and capital efficiency all at once.

• USDC sacrifices some decentralization for stability.
• DAI sacrifices some capital efficiency to maintain decentralization.
• The tragic UST abandoned stability.

Ultimately, rather than one perfect stablecoin dominating all, a world of diverse stablecoins fulfilling different roles and purposes will coexist. Bridges connecting traditional finance and DeFi, censorship-resistant free money, and the foundation of a new token economy—all intertwined to build a more efficient and transparent future financial system. We stand now at the very beginning of this massive transformation.